Jun 16

Are savvy traders running from this market or are they getting ready to buy the next bounce?

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

So much for the Fed bounce, the S&P 500 gave back all of Wednesday’s gains and then a chunk more, finishing at the lowest levels in a year and a half. Ouch!

Gas is pushing $5/gal, mortgage rates are creeping up to 6%, consumer confidence is tumbling, and inflation remains stubbornly stuck at 40-year highs. Oh yeah, and there’s the biggest war in Europe since WWII. But other than that, things are going pretty well.

As poorly as everything feels, stocks are not oblivious and their nearly 25% decline reflects a lot of this pain.

Most bear markets bottom out between 25% and 30%, meaning we are most of the way there for a vanilla bear market. There are exceptions, like the Great Depression and the Great Recession, but the banking system nearly imploded in those episodes and for a repeat, we’d need to see something equally terrifying.

While $5/gal oil is painful, the biggest problem we have right now is most people have too much money and are bidding against each other for housing, cars, and everything else that is in short supply. Our biggest problem is the economy is too hot and the Fed is trying to cool things off.

Does that sound like our current situation has anything in common with the worst bear markets in history? No, not really.

And so while people are afraid of how much worse this will get, it is a little late to be worrying about that kind of stuff seeing as how most of the damage has already been done to stocks.

Maybe this grinds sideways for a year or two, which wouldn’t be a big surprise. But fearing a 40% or 50% selloff from the highs doesn’t match our current economic situation.

As for how to trade this, while Thursday’s 3.3% decline sounds bad, stocks ground more sideways than anything following the gap lower at the open. That means few people were rushing to sell stocks through the day, which is the first thing that needs to happen before we find a bottom.

Maybe we get a little more selling on Friday, but everyone knows markets moves in waves and after falling more than 500 points over a handful of days, the next near-term bounce is just around the corner.

I covered my short Wednesday, which proved to be a little early, but that’s the way this goes sometimes. Once we realize only fools try to pick tops and bottoms, that means accepting we will always cash in a little too early or a little too late. That’s just the nature of the game.

But now that I’m out, I’m already looking to get back in. The next trading opportunity that excites me most is a nice bounce back to 4k resistance. It could start as soon as Friday, so be ready.

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Jun 15

What made Wednesday’s bounce so predictable

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 bounced nicely after the Fed got aggressive and hiked interest rates by 0.75%.

The market’s reaction seems counter-intuitive, but lucky for readers of this blog, it was the most likely outcome I flagged in Tuesday evening’s free post:

While this latest tumble was largely spurred by expectations shifting to a 0.75% Fed rate hike this week, this could very easily turn into a “sell the rumor, buy the news” event. This latest wave of selling priced in most, if not all of the widely expected rate hike, so when the news becomes official Wednesday afternoon, there might not be much selling left to do. And when a large wave of follow-on selling fails to materialize, we often see prices rally in relief that things weren’t worse.

The most likely scenario is the index reflexively crashes immediately following the Fed’s announcement of a 0.75% rate hike, but not long after, the selling capitulates and prices bounce, giving us that oh-so-beautiful “V” bottom.

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While bears were expecting another large selloff, stocks bounced because all of the people who were afraid of a 0.75% rate hike sold over the previous four sessions, meaning there was no one left to actually sell the news. And more than that, some investors were actually reassured by the Fed’s aggressive stance on inflation. Attacking inflation harder in the short term will keep this from dragging on, or at least that’s the hope.

As for how to trade this, when the rate hike failed to trigger a larger wave of selling, that was my signal to lock in some really nice short profits and get ready to buy the bounce. I still think we have lower prices ahead of us over the medium and longer-term, but over the near-term, if Wednesday’s bounce holds Thursday, 4k resistance is the most likely next target.

Any bears with nice short profits should be getting real protective because those profits will disappear if they hold much longer. As easy as it is to reshort the market when the selling resumes, lock in some nice profits here and get ready for the next breakdown.

As for dip buyers, here is our chance for a quick 200-point rally. While that doesn’t seem like a lot, catch that 5% wave in a 3x ETF and now we’re talking real money for a few days of “work”.

Cover shorts, buy the bounce, and leave stops/reshort under Tuesday’s lows. That seems easy enough.

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Jun 14

What Tuesday’s small decline tells us about what’s coming next

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 slipped 0.4% Tuesday.

While a small loss usually isn’t something worth worrying about, these are not usual times. The lack of a meaningful bounce following Monday’s nearly 4% crash suggests the selling hasn’t capitulated yet and lower prices are still ahead of us.

I typically have a bullish bias when it comes to the market because stocks spend far more time going up than down. That means I’m always on the lookout for a bounce to buy, but Tuesday’s price action didn’t check my boxes.

As I often write, the market loves symmetry and this crash will almost certainly capitulate in a “V” bottom. Unfortunately, Tuesday’s modest slip lower doesn’t look anything like the start of a “V” bottom.

While this latest tumble was largely spurred by expectations shifting to a 0.75% Fed rate hike this week, this could very easily turn into a “sell the rumor, buy the news” event. This latest wave of selling priced in most, if not all of the widely expected rate hike, so when the news becomes official Wednesday afternoon, there might not be much selling left to do. And when a large wave of follow-on selling fails to materialize, we often see prices rally in relief that things weren’t worse.

The most likely scenario is the index reflexively crashes immediately following the Fed’s announcement of a 0.75% rate hike, but not long after, the selling capitulates and prices bounce, giving us that oh-so-beautiful “V” bottom.

And of course, another real possibility is the Fed is the one that capitulates and sticks to its previously telegraphed 0.5% move. That would also trigger a nice pop in the market. (Or counterintuitively, the market freaks out and stocks crash because investors start fearing the Fed lacks the courage to combat inflation.)

Will any of these things happen Wednesday afternoon? Only time will tell, but they are definitely scenarios we need to incorporate into our trading plan. If we can’t map out our responses ahead of time, how in the world are we going to do it in the heat of battle?

While we will likely see further selling before reaching the capitulation bottom, once that bounce takes hold, shorts need to get out of the way and everyone else needs to grab ahold because the move will be fast and hard. Maybe the rebound stalls at 4k resistance, but a 300-point rally in 3x ETF is enough to put a pile of cash in your trading account. You like cash, right?

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Jun 13

How savvy traders avoided all of this carnage, plus what the inevitable bounce will look like

By Jani Ziedins | End of Day Analysis


Free After-Hours Analysis:

Down 1%. Down 2.4%. Down 2.9%. Down 3.9%. In case anyone hasn’t been paying attention, it’s been a very painful several sessions for the S&P 500.

Luckily for readers of this blog, we were pulling the plug not long after this selloff first got started. As I wrote last Tuesday evening when the index closed at 4,160:

The best part about being a nimble trader is we can both stay safe and still be in a position to profit from the upside. As easy as buying back in is, there is no reason to stubbornly hold a dip. For as many times as being stubborn works, there are a dozen times it bites us in the ass. I would much rather sell and buy back in hours later than I would watch the losses pile up as I keep waiting for a bounce that never comes.

Now that the index is back above 4,150, I can spread my stops across the lower 4,100s. If we retest support again this week, there is no coming back from that and lower prices are ahead.

Little did I know that four sessions later, the S&P 500 would close at 3,750 after shedding more than 400 points along the way. But here’s the thing, I didn’t need to know how far this was going to fall in order to know it was a good idea to get out of the way. When the market violated my trailing stops above 4,100, I got out, no questions asked.

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We can pin this weakness on last week’s higher than expected inflation reading. Or bond futures predicting the Fed juicing interest rates 0.75% this week. Or maybe it’s $120/bbl oil and $5/gal gas. Or mortgage lenders quoting 6% interest rates. Or most likely, all of the above.

But as a trader, does it really matter? Stocks are falling and disciplined traders have no choice but to get out. Our trading accounts don’t care about the fundamental reasons.

And for the more aggressive trader, violating 4,100 support was the perfect invitation to throw on a short trade. Falling 10% over four sessions sounds shocking. But catch that wave in a 3x inverse ETF and now other people’s pain is our gain.

But avoiding losses and profiting from big declines takes discipline and a willingness to act. Savvy traders were pulling the plug before anyone realized something was wrong and we were putting our foot on the accelerator when the panic first started setting in. While most people are lying awake at night fearing the selloff will get worse, I’m wondering how much longer I should ride this wave before locking in my short profits. Which side of the coin would you rather be on?

As for what comes next, the selling has been brutal. But as I often write, the market loves symmetry, so the most likely outcome is a rip-your-face-off rebound from grossly oversold levels. Maybe the selloff ends in a dramatic “V” bottom after the Fed “only” raises rates by 0.5%. Or maybe we get another leg lower after they raise rates 0.75%. But either way, this is going to bounce hard and fast when it finally bounces, so be ready.

For the short trader, that means locking in profits quickly because a bounce back to 4k resistance will erase almost all of these really juicy profits. And for the nimble swing trader, buying the next bounce to 4k in a 3x ETF will put another wad of profits in our pocket.

Profiting from volatile markets isn’t hard as long as we have the confidence and discipline to trade proactively.

There is nothing positive to say about Bitcoin after this cryptocurrency plunged nearly 30% over the weekend. The best this can hope for is that it is getting so ugly it’s good. But we’re not there yet.

This cryptocurrency will bounce alongside the equity market, whenever that happens, but expect $30k to be a ceiling and any dip buyers should be locking in profits long before then. As attractive as these prices seem, it will be a long time before Bitcoin is investment-grade again.

Buy the bounce for a quick buck but nothing more.

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Jun 10

What savvy traders are expecting from this bloodbath next week

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis:

Oof, that was an ugly week. The S&P 500 shed 5% over the last five sessions, with most of that coming during Thursday and Friday’s multi-percent bloodbaths.

The week started off well enough with the index challenging multi-month highs on Tuesday. But that turned out to be the high point of the week and it was all downhill from there. That said, the mad dash for the exits didn’t really begin until Thursday afternoon when 4,100 support failed. And as fast as things got moving, 4k didn’t stand a chance and that fell before the market even opened Friday morning.

With Friday’s close leaving us directly on top of 3,900 support, does anyone actually think this level stands a better chance of holding? I sure don’t…

As regular readers know, I’ve been a big proponent of buying and holding May’s bounce the last few weeks. And it was a great trade, with the index rallying nearly 10% from May’s intraday lows. (Catch that wave in a 3x ETF and we’re talking real money!)

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The rebound was acting well and 4,300 seemed within reach. But every seasoned trader always shows up to battle with an escape plan. No one is ever right all the time. In fact, most of us are wrong far more often than we care to admit. But if we want to succeed at this game, we always have a plan for being wrong.

For me, that safety net was my trailing stops near 4,100. I was confidently holding for higher prices but my trading plan wouldn’t allow me to get caught flatfooted under 4,100. By now, everyone knows all too well just how costly holding a little too long can get.

I locked in profits near 4,100 and when things really started falling apart, I flipped around and went short. It’s not the trade I was looking for, but it’s the trade the market gave me and I’m not one to look a gift horse in the mouth.

As for what comes next, this has been an emotional selloff and that means oversized moves…in both directions. This week’s tumble will most likely keep falling early next week, but once the selling capitulates, the bounce from oversold levels will be hard and fast.

Shorts need to be nimble and take profits quickly because the bounce will lop off a big chunk of their profits if they hold even a few hours too long. For those in cash, wait for the bounce, start small, get in early, and keep a stop under the lows. Pull the plug if the bounce fizzles and add more if it keeps working.

Monday will most likely be ugly. And Tuesday too. But a sharp bounce from oversold levels is coming, make sure your trading plan keeps you on the right side of it.

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Jun 09

How savvy bulls avoided Thursday’s carnage

By Jani Ziedins | End of Day Analysis

Free After-Hours Analysis: 

The S&P 500 proved again on Thursday that a lot can change in a few hours.

As I wrote Tuesday evening, everything looked great. An early 1% loss ran out of sellers and turned into an impressive 1% gain. Weak markets don’t do those things and I was content holding for the largely expected continuation to 4,300 resistance.

But hidden at the bottom of Tuesday’s overwhelmingly positive post, I had one small nugget that proved to be all too relevant on Thursday:

Now that the index is back above 4,150, I can spread my stops across the lower 4,100s. If we retest support again this week, there is no coming back from that and lower prices are ahead.

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Every good offensive plan starts with defense. If we don’t define our limits up front, we are trading without any and few things are more dangerous to our trading accounts.

As much as I liked Tuesday’s price action, I wasn’t willing to sit there unprotected. If Tuesday’s bounce was the real deal, it wouldn’t retest 4,100. Slipping back to support so soon after bouncing off of it means something is wrong. And as we found out Thursday, when things go wrong, they can go really wrong.

While everyone saw the market split wide open Thursday, most people missed the cracks that were already starting to show Wednesday afternoon. I didn’t like Wednesday’s fizzle and late retreat to 4,100 support. That convinced me to lock in some profits proactively. And Thursday morning’s stumble under 4,100 told me it was a better time to be safe than sorry.

I had no idea the market was going to shed nearly 100 points that afternoon. All I knew is the risk/reward was no longer in my favor. I liked the market and still thought 4,300 was the most likely outcome. But as easy as buying back in is, there is no reason to stick with a trade when it is flashing yellow. Because you know what? Flashing yellow turns into flashing red in the blink of an eye.

While most people were riding Thursday’s waterfall selloff lower, I was in cash and wondering if I should short the market. I was clearly wrong about 4,300, but as a nimble trader, I don’t mind being wrong. In fact, being wrong can be highly profitable if we are savvy enough to recognize it early and flip the script.

If I was wrong about 4,300 and 4,100 support, maybe I should be going the other way because if this breaks down, there is a lot of air underneath current prices. Rather than stubbornly stick to my prior position, I admitted defeat, pulled the plug, and joined the other side. No one likes being wrong, but I like making money a lot more than being right.

As for what comes next, it doesn’t look good. In fact, it looks dreadful. If the market doesn’t bounce hard at Friday’s open, get ready for more blood letting. Maybe the selling only lasts a few hours before capitulating. Or maybe we shed another 100+ points and challenge May’s lows. Either way, I don’t want to be standing in the way.

But as bad as this looks, the other thing I know is when this bounces, it is going to bounce hard. I don’t if that will happen, Friday or sometime next week, all I know is when this bounces, I’m covering my short and going long.

Either we ride this market or it rides us. You decide.

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